The Wealth of the Nation

During the last two and a half years there has been no shortage of comment on what is at fault in Reagan’s economic policy; the very word Reaganomics has now developed a well-justified connotation of acute denigration. And, however overtly immune, the administration itself has not been wholly unaffected. There has been a disorderly retreat from supply-side economics; its surviving proponents, in unlikely alliance with the liberal left, have now turned their fire on the monetarists. “Tight money” did them in. As to monetary policy, there also has been a retreat if not precisely a regrouping. Interest rates have been eased; the money supply, however defined, is no longer being so ostentatiously controlled, and Professor Milton Friedman, according to longstanding practice, has disavowed his former disciples. They have been slack and erratic; they have not stayed the course. This negative adjustment has been sufficiently strong so that there is now at least a glimmer of a chance of recovery. Those among us who predicted continuing disaster are hedging bets in a sensible way. It’s not that the original Reagan policies were any good; rather, there has been more willingness to retreat from them than most foresaw.

Such are the gains from purely negative reform; it may be that they are not slight, and we must be grateful in the economic world for small achievements. Still, it would have been agreeable and enlightening if, during these last years, there had been more affirmative comment on what should replace the Reagan despair. Washington is alive with committees to this end; the results so far have not been notably rewarding. Nor, as yet, have the speeches of the Democratic candidates. Nor, with exceptions, have the proposals from the professional economic world. For innovative ideas, Felix Rohatyn has had the field to himself to an undue degree.

The reasons for this reticence are not obscure. Apart from the considerable pain and effort associated with affirmative thought, there is, for the politicians, the terrible choice between going back to what seems an unhappy history and going on to what seems unduly dangerous innovation. In his last presidential months Jimmy Carter, surrendering to his economists and Paul Volcker, achieved a serious recession, substantial unemployment, and a high rate of inflation. No one wants to return to that. And for the risks of premature innovation, there remains the terrible memory of George McGovern and his “demogrant” payments. Who can think it wise to get out in front like that again?

For the economists, there is, again with many exceptions, the matter of professional reputation and esteem. Anything new, being in the nature of the case untried and unproven, has a slightly radical aspect. In the strictest sense of the term, it lacks reputability and therefore is something that the decently circumspect scholar avoids. Professional esteem is best safeguarded, even enhanced, by a thoughtful articulation of what is already believed, a powerful recommendation of what is already a matter of actual experience. What has come to be called “mainstream economics” is, generally speaking, what avoids serious risk in policy matters.

As I have said, there are exceptions. At Harvard a little more than a decade ago, an interesting group of young economists set out first to master the apparatus of mainstream economics and its techniques, and then to bring a relentlessly critical judgment to bear on it. All were called radicals; some were described as Marxists, theirs being, in fact, a faith that Marx almost certainly would not have recognized. They were a source of no slight embarrassment to everyone of an adequately orthodox disposition. In the past those who rejected the accepted economics could be criticized for not understanding it. Or for a tendency to substitute political rhetoric for serious academic diligence. None of these objections held in this case; the men I am referring to were exceptionally competent in the ideas they were attacking and something of an example in their commitments to teaching and research. In an extraordinary access of honesty in these matters, their instinct for professional inconvenience and dissent became the only seriously stated source of objection to them in Cambridge. They dispersed to the universities of Massachusetts and Michigan and to the New School for Social Research.

This did not discourage them; they remained in close communication, and three of them have now come forward with the very interesting book under review. It is not at all lacking in suggestions on what should be done to rescue the American economy from its present desuetude. To both their diagnosis and their remedies, especially the former, they bring a thoroughly competent knowledge of the methodology and theoretical models of the established economics. Their ability to find (and occasionally to accommodate) data in support of their position is, indeed, little short of remarkable, as also their ability to bring the statements of wholly orthodox scholars and others to their support. Some of this analysis and rather more of their recommendations I do not find persuasive. In particular, there is an inherent conflict between, on the one hand, their picture of the power structure of the American economy and polity and, on the other, the society which, that power notwithstanding, they believe can emerge from their recommendations. But no one should be put off from reading the book by my objections—and the many others that it will surely invite. It is a welcome step away from the compulsive respectability that limits much, if not most, of the writing on this unhappy subject.

The authors’ case is that for roughly the first two decades following World War II, American capitalism worked very well and did so because of American economic advantage and military influence throughout the world, as well as a general acceptance of things by the Third World and by people here at home, including those in the trade unions. There was, in these years, a broad citizen/business accord. But then, during the mid-1960s, or thereabouts, things began to change: our international political, military, and economic eminence was challenged; suppliers of raw materials were less inclined to accept their modestly compensated fate. On matters ranging from trade-union claims to the pressure for social legislation and environmental protection, the domestic system came under challenge. Subject to some disguise by the Vietnam war boom, the postwar economy entered upon decline, a period of crises. This was notably manifest in the combination of rising prices, diminishing productivity gains, and increasing unemployment—what was to be called stagflation.

In the third postwar phase, which began well before the Reagan administration but which was greatly intensified after the 1980 election, the corporate system reacted to crush the burgeoning strength of the citizenry and the trade unions. The primary instrument was astringent monetarism. This, using a phrase borrowed from Leonard Silk of The New York Times—and showing the authors’ ability to find aggressively respectable antecedents for their ideas and terminology—they refer to as the Great Repression. They also, and this is a point for which I personally have much sympathy, find in the resort to monetarism a far greater manifestation of pecuniary interest than is commonly recognized.

Monetarists practice flawless common sense: those who have a lot of money generally benefit by keeping money scarce. Tight money can be rough for those who do not have enough. It can also plague rapidly expanding businesses which want to borrow until their investments recoup initial outlays…. Monetarism favors stability over rapid growth and “solid” money over progressive redistribution.

Few concepts, I would urge, are socially so regressive as the supposition, taken for granted by the monetarists and unchallenged by the textbooks, that monetarism, whether it works or does not work, is socially neutral. In fact, it is wholly rewarding for those with money to lend. And, as is observed in the book, they are generally those with the most.

Having looked at the history, the authors go on to assail the more elementary view of the “zero-sum society”—the belief that the American economy is working at or near capacity and that further expansion requires investment sustained by more personal saving and appropriately reduced consumption. Without great effort they are able to identify large unused resources in our economic life as it is now pursued. Extensive plant capacity is not used, and there is a large pool of unemployed labor. Workers are not working effectively, an important point for the authors. The corporate superstructure is increasingly costly and wasteful. The Pentagon absorbs resources for which there is no justification or need. And much more. They estimate and aggregate the effects of waste in the economy and conclude that output in 1980 could have been higher by around half than was actually the case. One can have doubts about the precision of some of their calculations without, I think, being seriously at odds with their overall findings. The American economy is, indeed, functioning and has been functioning at a fraction of its potential. This is not a highly controversial point.

Turning to the reasons for this failure, they put major blame, recession apart, on stable or declining worker productivity. They reject any notion that this is the result of a shortage in investment funds and the profits that might cause it to be forthcoming. The decline in productivity preceded the fall in investment and profits. Nor do they attribute any responsibility to the financial burden of government. West Germany and Sweden, where government is relatively more expensive, have done much better. The problem is a grievous lack of motivation in the modern corporate work place. Their views, as they observe, echo a wide range of modern business comment; they are exceptional only in stressing the reluctance to do something about it.

Corporations have shown all kinds of interest in improving worker motivation, but they have shown even greater interest in preserving their centralized power and privileges. Forced to choose,…most corporations have preferred to forego greater worker effort rather than to give up any management control.

Before getting on to their own recommendations, the authors consider the three “pro-business” remedies and the two they think will contend for attention in the next several years. Supply-side economics, they believe, has been adequately discredited by the first two years of the Reagan administration; it will recede from view. The next debate will be between monetarism and what they call “corporatism.”

Monetarism will regain its former pride of place among conservatives and free marketeers. [But] those who cannot stand either the costs or the risks of monetarism will lean more and more to the newer entrant in the probusiness-policy sweepstakes—a corporatist strategy which advocates selective government intervention in support of corporate interest and profits.

The latter design remains somewhat vague; presumably it will involve heavy public investment in laggard or potentially promising sectors of the economy, a return to regulation and protection where these are indicated, a sense of accord among capital, labor, and the citizen. In the words of Business Week, “sacrifice must not be exacted from groups—the poor, for example—who are least able to bear it,” although in the authors’ view, it “must…result in a transfer of resources from consumption to investment and wage and salary earnings to profits.”

With all this will go a continuing effort to assert American economic influence and military power around the world. “The corporatists,” they conclude, “have a better shot at stable recovery than either the supply-siders or the monetarists.” But there would be grave internal complexities to be overcome, and the authors do not think that the result would be at all consonant with democratic attitudes and institutions. The ultimate power of economic and political decision must lie with corporate enterprise. This being unacceptable (one hopes to others as well), they go on to their own program.

This, numbering some twenty-four points, has as its basic theme the democratization both of the individual business enterprise and of the macroeconomic design by which the modern economy is guided. No one, or anyhow not many, now running for office will think their program lacking in diversity or scope. Public employment at a wholly livable wage should be available for all who would be otherwise unemployed—an idea, it should be noted, that goes back to that insouciant radical, Fiorello LaGuardia. A fairly high floor should be placed under all wages, among other purposes to force the liquidation of low-productivity, low-paying enterprises and employers. The tax system should be drastically reformed to place the weight of revenue collection on the final recipient of income—the corporation tax would disappear. There would be a sharp differential between earned and unearned income. The authors would, of course, reject the flat-rate tax, but, in a further and substantially conservative step, they would make taxes progressive only for incomes over $50,000.

In a less conservative mood they would move, as François Mitterrand has done, to take over the banks (with compensation to stockholders) as the basis for widening and democratizing the investment process. To achieve greater democracy in the management of the monetary system they would have the board of governors of the Federal Reserve System elected by the House of Representatives. Instead of repressing inflation with monetary and fiscal policy they would subject major corporate enterprises to a tax-based prices policy—taxes would be required when price ceilings are exceeded, rebates would be paid when costs press inexorably on prices, wages would be paid for child rearing. There would be a strong encouragement to community-based enterprises, strong support for environmental protection, including an unqualified right of localities to protect themselves from pollution. And again much more.

It will come as no overwhelming surprise that I have reservations on many of their proposals. It has, for example, always been a problem why monetary policy and the regulation of banks should be partially outside the democratic process—independent of the appropriations power of the Congress and of the executive authority of the president. Banking and money, it is held, in effect, are too important to be entrusted to democracy. But putting the Federal Reserve under the House of Representatives would sacrifice all hope of a systematically integrated and democratically responsible economic policy in which monetary policy has a role. Other proposals, such as the nationalization of the banks, will encounter difficulties from anyone who sees politics as the art of the even remotely possible. It is now widely agreed that the large international banks have had a record of startling incompetence in these last years. The losses through the Drysdale company, the Penn Square Bank, and the foreign loans made on the lemming principle that if one dives in, all should follow are cases in point; the larger the loans and thus the greater the executive judgment brought to bear, the more fanciful, it would appear, was the error. Congress is now awash with suggestions for stronger regulation—or how the erring enterprises can be made to pay some of the costs of their mistakes. But a public takeover remains an unduly distant proposition.

I also have difficulty with the authors’ proposals on wages and taxes, and, a common fault of the modern left, they seem to me too casual about fiscal policy. What should be welcome is their attempt to bring a wide variety of ideas into public and academic discussion. One of the oldest of democratic services is that of afflicting those who are comfortably in defense of the status quo or ideologically committed to the status quo ante. This was never more needed than now, if only to relieve the tedium of the commonplace.

I have a more serious complaint about the authors’ position on political power. It involves a contradiction they do not fully address and an ambiguity they do not resolve. They see the present sorry behavior of the economy as the result of a thoughtful and deliberate exercise of corporate power. But they also see it as a power that could and should be rejected. The reader is left asking just how. This contradiction is made more severe by their conviction that the present disaster is designed—that it reflects in a deliberate way the interest of the corporations. This I do not believe; I would attribute far more to adherence by the corporate world to outdated and irrelevant ideology and to political leaders, not excluding the president, who do not know what damage they are accomplishing.

As to the ambiguity, it is not clear whether the authors see power as residing with capital and the capitalists or with the more deeply bureaucratic tendency of modern corporate management. At most points in the book one has the impression that the emphasis of the authors is on the prescience and power of capital; thus the possibility of a comprehensively malign design. But at other times the problem is seen as one deriving from the autonomous bureaucratic dynamic in the modern corporation.

My own view, it is perhaps needless to stress, is that far more of our present economic problem is to be attributed to corporate bureaucratic tendency than to calculated capitalist design. Pecuniary interest is not dead; as has been noted, it extensively supports our commitment to monetarism. But we are far more in the grip of the undesigned dynamic of great organization—a subservience that, it might be observed, we share in some measure with the socialist and communist world. It is a point which the authors should have confronted in their own arguments and which they could have made clear to the reader.

Having so rebuked them, I return to the main point. It is good to encounter a book that backs its position with information organized with technical competence, that does not avoid controversy but instead invites the attack of the right, the center, and even, I venture to think, more than a few on the parochial left.